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Finance Research Shows that a Firm’s Political Affiliation Predicts Likelihood of it Facing Certain Legal Woes

August 20, 2012
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The likelihood that a firm will face litigation in particular areas is directly related to whether a company leans Democratic or Republican, says a new study from the School’s Department of Finance. The study found that Democratic-leaning firms are less likely than Republican-leaning firms to be sued for environmental, labor and civil rights violations, consistent with the Democratic ideology that places greater value on environmental protection, humanitarianism, and equal opportunity. In contrast, the study found, firms with a Republican culture are less likely than Democratic-oriented firms to face legal action for securities fraud and intellectual property rights violations, consistent with the core Republican values that support business, property rights, market discipline, and limited government regulation.

Researchers first obtained a list of all lawsuits filed against companies between 1993 and 2007, close to 53,000 in all, and then identified the more than 1,700 firms involved in those proceedings. They then categorized them by the type of litigation -- approximately 31,000 civil rights, 3,500 labor, 960 environmental, 3,000 securities, and 5,000 intellectual property lawsuits. (NOTE: Utilities and financial firms were excluded since they are far more subject to regulation and managers have much less discretion over the choice of leverage and firm policies.)  Researchers then determined the political culture of those firms using a number of criteria: campaign contributions made by each firm’s CEO and top managers, the Political Action Committees (PACs) each firm supports, and the campaign contributions made by residents of the state in which the company is headquartered.

Key findings include:

  • Compared to firms with a Republican culture, Democratic-leaning firms are 13.6 percent less likely to be the subject of employment civil rights litigation, 4 percent less likely to be the subject of labor litigation, and .8 percent less likely to be the subject of environmental litigation.
  • Compared to firms with strong Democratic culture, Republican firms are 2.4 percent less likely to be sued for securities violations and 5.6 percent less likely to be sued for intellectual property violations.
  • Republican-leaning firms are 8 percent more likely to face litigation in general compared to firms with a strong Democratic culture.
  • On average, the stock market reacts more negatively to litigation events involving firms with a Republican culture, perhaps because investors are more surprised. Thus, the relations between political culture and litigation propensity across different domains is not fully recognized by the stock market. Investors hold an incorrect prior belief that Republican firms are less likely to engage in wrongdoing in most domains.  

“This study shows that a firm’s propensity to engage in certain types of corporate misconduct is deep-rooted in the culture of the firm and may be very difficult to change,” said Alok Kumar, the School’s Gabelli Asset Management Professor, who conducted the study with Irena Hutton and Danling Jiang of Florida State University. “Our findings also indicate that the influence of Republican and Democratic ideologies extends much beyond the political arena.”

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